Wednesday, December 5, 2012

I am not going to make the effort of catching up on the whole conversation. As a policy matter, I agree with Scott Sumner: we should not be worrying about Cantillon effects. They don't seem to present the major problem. As an empirical matter, I think there's some evidence for them. The work of Andrew Young is some of the best on this. I'll be reviewing this empirical literature in my forthcoming Critical Review article on Hayek's business cycle theory. The idea makes fine sense, but we seem to have much bigger issues to worry about when it comes to the business cycle.

But a lot of this discussion has been about injection points specifically. I don't think that's the only thing to worry about. The problem with Cantillon effects is not that the government is handing money to certain producers directly. The point is that when there's expansionary monetary policy (we hope) the volume of loans expands. Certainly it expands relative to the counterfactual. And that's all that's really necessary, because the sorts of producers that borrow when interest rates are lower after an intervention are different from the sorts of producers that borrow when interest rates are higher before an intervention.

That's the theory, at least. We have to be careful about reasoning from interest rates. The point is, I think the whole issue of Cantillon effects is a lot less tied to specific injection points than it's often made out to be.

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On a somewhat related note, in my forthcoming Palgrave chapter on the basic income guarantee and Austrian business cycle theory (Guinevere Nell is editing a book on Austrian and market socialist perspective on a basic income), I note that if we were to do expansionary policy through mailing money to people you may actually avoid a lot of these issues because households will split the money between consumption and savings at whatever their MPC dictates. That seems like it would operate less through new loans than current monetary policy, which seems like it would be less prone to Cantillon effects.

I don't personally support a basic income guarantee nor am I an Austrian - I just thought the argument would be an interesting one to lay out, and while there are many chapters in the volume on Hayek and the basic income (he supported one - not for the reasons I provide), there was nothing on Hayek's macroeconomics.

6 comments:

"The point is that when there's expansionary monetary policy (we hope) the volume of loans expands. Certainly it expands relative to the counterfactual."

Yes. But, the thing is that businesses have expectations that may be reasonably good. They may expect the interest rate to rise again in the future. The Monetarists debated this at length and I think everyone agrees now, though not necessarily about how good expectations are. I don't think expectations are perfect, but I think they blunt the edge of temporary low-interest-rate policies.

But, injection is still important because that's what drives account falsification. New money is injected and spent, it becomes profits before it becomes price inflation. That spurs on new investment spending and expands roundaboutness, just as reducing the interest rate does. It's much more difficult for business to "expect" their way around that.

Right, although if you expect interest rates to come down several years from now, the sorts of producers that would still find that profitable are still different from the sorts of producers for whom the calculus changes when expectations get brought in.

The other point I meant to mention - the problem I have with all this - is that Austrians just sort of wave their hands at the question of what's really unnatural and what's natural. It's quite possible that during normal growth periods the capital structure is fine, some kind of financial market disturbance interrupts that, and the central bank sets in motion salutary Cantillon effects that get the economy back to "normal". This possibility isn't discussed nearly enough by Austrians, I think.

As I've mentioned before lots of things get mingled here. Firstly, we have low interest rates and the "interest rate vector". Whereby interest rates affect investment behaviour. Secondly, we have the direct effects of injection. That is, one group receiving money (or more money) and spending it differently to how others would have spent it. Thirdly, we have account falsification, that's when the injection causes profits to rise temporarily because of increased demand, but over a longer period costs will rise too because of price inflation. So, the profits don't signal an improvement in the competitive position of a business. Most of the ideas about what's "unnatural" are based off the third and first aspect in Mises & Hayek. That is, low interest rates or high profits may cause increases in roundaboutness or capital intensity that aren't appropriate to future conditions. Rothbard also has a lot of trouble with the second aspect, since commercial banks make money from injections. I'm not so bothered about that and I don't think that many are outside of the 100% reservists.

My point about profits was mainly to shed doubt on this idea that capital effects are in the noise. I think that if businesses respond to changing profit then they can't be in the noise.

The whole situation throws up much more than just ABCT, which is what gets investigated most. Money supply shocks due to banking, due to increasing demand for money (itself due to uncertainty) as well as demand shocks and supply shocks are interesting. If I get the time I'd like to research more about this myself.

One other thing I meant to mention is that I think Cantillon himself (from the pieces of him I've read, and the discussion of him that I've read from Hayek and O'Driscoll) did have a much more purely point-of-injection theory. Current is probably right that that's in Hayek too, but I think Hayek broadens it a bit beyond the literal point of injection. The chief concern is that borrowers in low-interest rate periods are a different sort of borrower than borrowers in high interest rate periods.

Actually, there are shades of Stiglitz and Weiss in that point...

That point is "right", but I doubt it's of much macroeconomic significance.

I thought that was a good distinction, although I can see why Bob thinks that's just defining away the problem. This is also the sort of thing Cantillon himself had in mind.

But I think Hayek gets a bit more sophisticated than that. So monetary policy stimulates demand - we all agree on that. None of us thinks that money is neutral. Hayek noted that the sort of demand that it would stimulate in periods of low interest rates (and we can disagree with Hayek about whether interest rates are really "low" or whether we should even be talking about interest rates) was compositionally different from demand before monetary stimulus was applied. So even if monetary stimulus didn't target any one institution in particular, the sort of demand that gets created in a low interest rate or high inflation environment has a different production structure associated with it relative to the production structure before.

Hayek is concerned that new production structure (more elongated, etc.) is unsustainable.

I don't think it's a problem personally, but I do think it's a phenomenon that becomes an issue even outside of the targeted "fiscal" policy cases you consider.

Sheldon Richman - from the passages I read at least - was not making as sophisticated an argument as Hayek. He was providing more of an old Cantillon site-of-injection argument. It's the same sort of problem but the argument is more easily dismissed than Hayek's argument.